Knowing when to Sell your Stocks

There are several reasons which can determine the timing of selling your stocks. There is no right answer as to when you make the most profit on your stocks although the key is buy low and sell high but nobody knows when a stock has reached its lowest point or its highest point.

Stocks are investments for the long term and it is not because your stocks dropped a few percent that you have to sell them. The price of the stocks is always dropping and rising but there are certain personal reasons and some market-driven reasons which might consider you to sell your stocks.

An important reason in the decision of selling your stocks is the risk you want to take. Can you live with a loss of 5%; 10%; 20%? These losses are certainly usual in the stock market but in many cases only temporarily; your investment profile is important to know for the timing of selling your shares. For example, you are an investor who wants to limit his risk in a portfolio of 50% stocks and 50% bonds.

Because stocks can rise faster than bonds it is not unusual that your portfolio is changed in 70 % stocks and 30 % bonds; in this case you can consider selling a part of your stocks to make your portfolio according your profile. You can put this money now on a savings account. You can decide later if you want to do some investments with this money according your risk profile. Rebalancing your portfolio is necessary to keep the diversification intact.

When the stock market is going up you feel like a genius but there always comes a moment that the contrary will happen. Almost everyone will remember what happened in 2000 and we know that a great part of these stocks, and especially these in the technology sector, will never reach the values of before anymore because they were overvalued.

Deciding when to sell stocks is often very difficult. Not only economic reasons has an influence but also a lot of political reasons. How often do we read in the newspapers of political problems in certain countries and an announcement of a possible terrorist attack or a war like some years ago in Iraq? The consequence is very often that the prices of the stocks will drop dramatically and you can decide to sell your stocks. You can decide to sell some stocks because you will probably get opportunities after a time to buy them back at a cheaper price.

The timing of selling stocks is always a difficult decision. Your broker will never tell you when to sell your stocks because they don’t know it either. If they should do it the chance will always exist that your stocks will rise with 30% or more and even in a short time. Don’t you think that most brokers are afraid that you will blame them for giving you the advice to sell?

Understanding the real value of a stock is very important; the P/E ratio is a very important one to know if the stocks are not overvalued. A P/E ratio is based on the earning of the last 4 quarters and means in fact the money investors are willing to pay for $1.00 earnings. It is easy to calculate them; you only need to take the current price of a share and divide it by the earnings per share. The growth expectations are very important but if the P/E ratios of certain stocks are much higher than the market it is best that you consider selling.

Another important ratio which gives you an indicator for the future is the PEG ratio; this ratio reflects the expected growth of earnings and is easy to calculate. If you divided the P/E by the projected growth of earnings you will have the result of this ratio. By example the P/E of a certain stock is 25 and the projected growth of earnings is 10%; the PEG ratio is 2,5 which simply shows you the relationship. When the result of the PEG ratio is low and the P/E is high the value of your stocks can be good and it is not necessary to sell your stocks.

Selling your stocks is always a difficult decision, but if you pay attention on both ratios you will likely take the best decision for you and your stocks.